Which are the key factors when choosing shares for a growth market? We at SIGnet recently posed this question to our members. We asked them to list factors - such as valuation ratios - in order of importance, as well as their idea of attractive levels for each factor.
Using their replies, we have built a 'member-inspired' stock screen - you can see its criteria in table 1. We then applied it to the market in the hope of identifying some of the best opportunities around today.
Each of their criteria is shown in order in column of the accompanying table in order of importance. For example, prospective earnings per share (EPS) growth rate came top of their list.
The criteria our members liked:
| Criteria | Threshold | Met this | Met others |
|---|---|---|---|
| Prospective Earnings/share growth rate | More than 12% | 445 | |
| Prospective Price/earnings ratio | 6 to 19 | 392 | 143 |
| Price Earnings/Growth (PEG) | 0.4 to 1.1 | 46 | 21 |
| Return on Capital Employed | More than 17 | 636 | 17 |
| Net Gearing | Less than 53% | 1124 | 13 |
| Prospective Dividend | 3.5% or more | 376 | 2 |
| Cash flow/earnings per share | More than 1.4 | 24 | 2 |
| Relative strength 1 year | More than 15% | 516 | - |
| 5 year earnings per share growth rate | More than 16% | 395 | - |
The second column shows the average of what our members considered acceptable values. In the case of EPS growth, the average answer was 12 per cent.
Next, we scanned the UK market using the November edition of REFS for all companies that met each criterion. A total of 445 met the EPS test - see column 3. We then did a "progressive filter," looking for companies that also met the rest of the criteria - column 4.
The first five criteria left us with thirteen companies, which is a manageable sample for doing research. The results are in table 2.
Adding the sixth factor - a prospective dividend yield of more than 3.5 per cent - reduces it to Cranswick and Jardine Lloyd Thompson and the eighth filter – relative strength for one year in excess of 15 per cent - eliminates all the rest.
The requirement of more than three brokers providing forecast of earnings per share and dividend growth and PER eliminates six out of thirteen, one in Fledgling Index and five in Aim.
The variety of activity and size of these thirteen companies is fascinating, from Petrofac with a market capitalisation of £3.2bn to BrainJuicer at £17m. They are from eight market sectors. Details of the companies are as follows, with the brokers' consensus from ShareScope in brackets:-
The shares we found
| Company | Mkt | Sector | Pr Grw% | PER | PEG | ROCE% | Gear% | Pr.Div% | Brk |
|---|---|---|---|---|---|---|---|---|---|
| Amec | FTSE100 | SupServ | 14.2 | 15.2 | 1.07 | 24 | -78 | 2.26 | 9 |
| Bioquell | Fledgling | Healthcr | 13.6 | 13 | 0.96 | 39 | -27 | 1.61 | 1 |
| BrainJuicer | AIM | Media | 24.7 | 12.7 | 0.51 | 46 | -48 | 1.99 | 1 |
| Brks McDon | AIM | GenFin | 27.7 | 16 | 0.58 | 40 | -103 | 1.48 | 2 |
| Cranswick | FTSE250 | Food Pr | 12.4 | 10.5 | 0.85 | 37 | 40 | 3.5 | 7 |
| Group NBT | AIM | Software | 31.5 | 13.4 | 0.43 | 348 | -3 | 1.26 | 3 |
| Homeserve | FTSE250 | SupServ | 18 | 14.2 | 0.79 | 179 | 16 | 2.6 | 8 |
| JardLydThm | FTSE250 | N Lf Ins | 13.6 | 12.1 | 0.89 | 118 | -194 | 4.71 | 5 |
| Mattioli Woods | AIM | GenFin | 18.7 | 11.7 | 0.63 | 60 | -29 | 1.92 | 6 |
| Petrofac | FTSE 100 | Oil Eqp | 31.1 | 12.5 | 0.4 | 65 | -99 | 2.79 | 12 |
| ResearchNow | AIM | Media | 18.4 | 13 | 0.7 | 160 | -30 | - | 1 |
| SDL | Small cap | Software | 14.7 | 14.1 | 0.95 | 78 | -19 | - | 6 |
| Sys C Health | AIM | Software | 16.6 | 13.6 | 0.82 | 26 | -70 | 1.25 | 2 |
| Average | 19.6 | 13.2 | 0.74 | *94 | -50 | 2.3 |
The Software Sector contributes three very different companies, (all rated Buy).
SDL makes its money from translation services, 91 per cent from abroad. Systems C Healthcare has developed hardware and software for improving patient care and is working with all ten English Health Authorities following a successful application in the Isle of Man. Group NBT’s business is split between the UK and Europe in the provision of domain mains, web hosting and related services. Its customers include thirty companies from the FTSE 100.
The two Support Services companies are better known than the rest but are again very different. Both have consensus ratings of "weak buys". AMEC provides engineering consultancy and project management across the world, whereas Homeserve have become familiar with their vans providing domestic emergency services and just beginning to spread their concept abroad.
The two Financial Services appear to be specialists confined to the UK and have substantial institutional and directors holdings. Brookes MacDonald provide private client asset management and financial advisory. Three of the directors sold shares a few months ago. The shares are rated "strong hold." Mattioli Woods (a recent IC buy tip) specialise in pension consultancy and self-invested personal pensions and command "buy" ratings from the brokers.
The two Media companies are from the AIM index with only one broker providing estimates for each
Having a name like BrainJuicer Group can make an investor hesitate, but it carries out research out online research to produce market research for large multinational companies. This ties in with Unilever UK Holdings having a 38 per cent holding. The chief executive and chief financial officer have 47 per cent of the share capital between them. The rating is "strong buy".
Research Now is engaged in online fieldwork and panel specialists, half their work in Europe and half elsewhere - rated "buy."
The remaining four sectors have one company each.
Healthcare is represented by Bioquell which supplies bio-decontamination solutions and equipment to the Health Service in the UK, other half of its business being overseas. It's rated "buy."
The one Food Producer selected is Cranswick which has had steady growth of turnover, earnings per share, dividend, with activities confined to the UK. It specialises in pork, sausages and bacon, and its average rating comes out as "buy."
Nonlife Insurance fields Jardine Lloyd Thompson Group, which is engaged in risk management advice, insurance and reinsurance broking and the provision of employee benefits. Two thirds of its business is overseas. It has a prospective yield of 4.7 per cent and has held its dividend steady for five years. Also a buy.
Oil Equipment, Services and Distribution its largest company - Petrofac - has grown five times in the last four years. It provides facilities solutions to the oil and gas processing industry worldwide. The shares are recommended as a "hold" by brokers.
Depending how you assess the state of the market so you might put the above on your watch list or select from them those that appeal for own research and purchase.
